REITs With Huge Yields
The Dynamic Wealth Report
August 14, 2009
Government Guaranteed Returns Of 400%
I don’t know about you, but I love guarantees.
Guarantees ease my mind, especially when I’m buying a new product. I
know the product will work. I know the product has a good level of
quality. Honestly, the guarantee gives me confidence in the company
selling the product. You know what I mean.
That’s why we offer guarantees with all our products. We want all of our
customers to have the peace of mind knowing we stand behind our products
100%.
The only thing better than a guarantee is making money off of it, but
more on that in a moment…
One guarantee is considered the “gold standard” all around the world.
What am I talking about? A government guarantee of course. But not just
any government will do. You’re not going to give much credence to
guarantees from North Korea or Cuba. Neither would I.
There are lots of solid governments around the world, but the gold
standard is reserved for the United States government.
Now before you call me biased, listen to this.
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The reason the US government is the gold standard is simply because of
the US economy.
The strength of a government guarantee is all in the certainty of
payback. Every government relies on the ability to tax citizens. Where
else would they get their money? The stronger the economy, the stronger
the tax base. The US economy is the largest in the world, and that makes
US government guarantees the gold standard.
Now, you’re probably thinking I’m going to tell you to buy US government
bonds… wrong! I have a better idea.
Right now, 10 year bonds issued by the US government currently yield
3.5%.
I don’t know about you, but these returns aren’t very exciting. Heck,
once you factor in inflation, your return is tiny.
Some people don’t realize the government issues other types of bonds.
I’m sure you’ve heard of Fannie Mae (FNM) and Freddie Mac (FRE). These
are quasi government entities set up to provide liquidity in the home
loan market.
Think of it this way…
When you buy a house, you get a home loan. The bank who gives you the
loan makes you fill out stacks and stacks of paperwork. So much I’m
worried about the future of our forests.
Then the bank funds the loan. As long as your loan meets guidelines set
by Fannie or Freddie, the bank can sell the loan.
Why do this?
By selling the loan, the bank gets cash which can be loaned out to
another borrower.
Fannie and Freddie buy the loans from the bank. So where does Fanny and
Freddie get all their money? They issue bonds to investors of course.
Because Fannie and Freddie are quasi government entities, these bonds
have the implicit guarantee of the US government behind them. It’s a bit
complicated… These aren’t directly backed by the government, but they
might as well be. Last year during the mortgage crisis, the Feds stepped
in and took control.
Let’s keep it simple here.
The bonds issued by Fannie Mae and Freddie Mac don’t pay yields much
higher than the 10 year government bonds I described above.
So how can they generate outsized returns?
There’s a little known group of REITs investing in mortgage backed
securities (bonds issued by Fannie and Freddie). They borrow money at
really cheap rates. Then they buy bonds from Fannie and Freddie. By
adding leverage, they can really drive up their returns.
Just take a look at Annaly Capital Management (NLY).
Annaly owns $65 billion worth of mortgage backed securities! These bonds
pay them a nice return. After accounting for expenses and borrowing
costs, Annaly made close to $600 million in net income last quarter!
Because Annaly is set up as a REIT, they pay most of those earnings out
to shareholders in the form of a dividend.
If you owned Annaly stock right now, you’d be earning 14.3% on your
money… roughly 400% more than regular old government bonds. And best of
all, these investments are practically guaranteed by the US government!
A yield 400% better than government bonds and backing from the US
government… Can you think of anything better?
• Gap (GPS) was upgraded by Wedbush Morgan this week.
They now have an "Outperform" rating on the stock. Signs of recovery are
sure to drive retailers higher.
• Intercontinental Hotels Group (IHG) was downgraded to
an "Underperform" rating by Jefferies. They must still see weakness in the
travel & tourism industry… I think they’re going the wrong way with this
one.
• FBR started coverage on Star Bulk Carriers (SBLK) this
week with an "Outperform" rating. Shipping rates are down, but a rebound
in the economy should push this group higher.
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